9/01/2006 @ 11:00PM

The New Barbarians

Free software. Bargain chips. The always-on Internet. Today’s tech giants are in danger. But the next big boom has already begun.

William Coleman doesn’t need to make another fortune in high-tech. He is 58 years old and–twice–has earned more than enough money to retire. The first time came in 1993, when Coleman was 45 and had just quit after eight years at
Sun Microsystems
. The second time came a few years later, after he cofounded
BEA Systems
, a $1.2 billion (sales) maker of Web software (known as Bill, he is the “B” in BEA); in the bubble his net worth approached the billion-dollar mark. Yet here he is, chasing another tech boom. It’s like an addiction, he says. He can’t stop himself.

This next wave is going to be bigger than anything that came before it, says Coleman, a former ski racer who still skis 35 days a year, and he can’t bear to just stay on the slopes and watch. And so he has created a new company, Cassatt, to go after it. He believes this one could end up bigger than BEA. “We are going into a period of unbelievable disruption,” he says. “We’re about to see a huge tectonic shift, more dramatic than anything in the past. This is the next boom, the next big storm. Things are going to get really wild.”

They already are. Coleman is one of dozens of new barbarians plotting the Cheap Revolution, the wholesale shift by corporate customers and techmakers to cheap chips and open-source (often free) software such as Linux. They are embracing simplicity, unlocking prodigious new power and cutting tech costs by up to 90%, threatening the Silicon Valley plutocracy: the proprietary gear, “closed” software, redundant backup systems and fat profit margins of incumbents like
Microsoft
,
IBM
,
Oracle
,
Cisco
,
EMC
and other blue-chip nameplates.

The Cheap Revolution may help explain why much of old-line tech has been dormant since the crash that began in early 2000: Customers are spending, but they spend in new places and get far more for their money. This next round of upheaval will dictate which titans of old tech never come back and which adapt well enough to survive. Coleman and other Valley veterans want to use this wave of creative destruction to produce a new generation of giants–and new tech fortunes.

Peter Yared is a new barbarian intent on sacking Coleman’s old creation, BEA Systems. Yared, a Maserati-driving, 35-year-old former Sun engineer, is now chief executive of ActiveGrid, a San Francisco firm staffed with Sun defectors and bent on undercutting software sold by BEA, IBM and Sun. For a package that costs $180,000 from the big guys, Yared boasts, he’ll charge $10,000. ActiveGrid even peddles a free, stripped-down version to get customers started. “You see that $5 billion market cap at BEA?” Yared says. “That’s going to be ours. That’s us in five years. Screw them. BEA has its head in the sand. Their business model is out of whack. We are going to take them out.”

Engineers are fleeing BEA, Microsoft, Oracle and Sun to push the Cheap Revolution at no-name shops in obscure office parks in San Jose, San Mateo and Redwood City. David R. Dargo Jr., a programming hotshot at Oracle, retired in his 40s and was playing golf all day long when he was lured back to the Valley. He leads fellow Oracle alumni at Ingres, a database maker that aims to undercut Oracle with lower prices and better service. Paul Maritz, who ran development at Microsoft before quitting in 2000, has assembled a team that includes some former Microsoft engineers at his new firm, PI Corp., to outdo Windows.

“The last thing elite talent wants to do is work on making a 15-year-old software program into a 20-year-old software program. The hot new project is where hot talent gravitates,” says Scott Dietzen, former principal architect at BEA. He quit in 2004 and is now president of Zimbra, a San Mateo maker of a new age e-mail program that sells for half the cost of Microsoft’s product and boasts features Microsoft doesn’t match.

The Cheap Revolution (a buzz phrase coined by forbes publisher Rich Karlgaard in a column in April 2003) has already claimed significant casualties. Sun, Coleman’s former employer, seemed to rule tech six years ago; now it teeters on the edge of the tar pit. Silicon Graphics, another former highflier, sought bankruptcy protection in May.

Now newcomers are pushing lethal Linux into new markets:
Motorola
cell phones,
Sony
TVs and
TiVo
digital recorders; networking routers (Cisco and Nortel face new low-cost rivals; and data storage (EMC and Network Appliance are in the crosshairs). Every big software maker–including Microsoft, BEA, IBM, Oracle,
SAP
, SAS Institute, Veritas and VMware–now faces rivals pushing open-source or Web-based alternatives. The sellers of these cut-rate packages willingly accept profit margins of less than 10%, one-third that of tech’s Old Guard.

“All these guys that sell proprietary hardware with proprietary operating systems and massive margins, they’re all dead,” declares Simon Lok, founder of Lok Technology in San Jose. This year he expects to sell $4 million in routers based on off-the-shelf chips from
Intel
and
Advanced Micro Devices
and a free open-source operating system called OpenBSD, charging 90% less than Cisco for what he claims is tighter security and better performance.

At Cassatt, Bill Coleman, a former Air Force captain who has worked in tech for 35 years, saw the cheap wave coming more than a decade ago, when he was still at Sun. “Computing is becoming a commodity. Right now we’re seeing an acceleration in that trend, where the cost of basic computing is being driven down to almost zero,” he says. “This is just evolution.”

Back in the bubble Coleman’s stake in BEA Systems pushed his net worth close to $900 million. On paper. In January 2001 a grateful Coleman created the Coleman Foundation and pledged 4 million shares of BEA stock, worth $250 million at the time, to find ways to use technology to improve the lives of the mentally disabled. He and his wife of 22 years, Claudia, have no children, and the cause became important to them after their niece was born with trisomy 13, a syndrome caused by an extra 13th chromosome.

By October 2002 the dot-com crash had erased much of Coleman’s fortune–his BEA stock had plunged from $86 to $5–leaving him with $50 million and an unfulfilled pledge. “Part of the reason I started Cassatt was to make enough money to fund the whole $250 million,” he says.

He stepped down from day-to-day duties at bea in 2001, just as tech was settling into its long slide, and was hanging out in Aspen but looking to start another company. “I’m just not very good at sitting around having fun,” he says. In 2003 he heard the tale of a cadre of crack engineers who had quit Cray Research, the old supercomputer maker, to explore bringing powerful features down to the world of cheap servers. So Coleman raised $30 million from Warburg Pincus in August 2003 to acquire the ex-Cray team and their software and started Cassatt. Since then Cassatt has raised another $30 million from investors that include In-Q-Tel, an investment arm created by the Central Intelligence Agency.

Cassatt’s software, dubbed Collage, takes aim at certain inefficiencies of old tech: the hodgepodge of rival incompatible servers and software from a dozen or more vendors and the need to buy far more computing power than customers truly need to accommodate peak usage times and redundant backup systems.
Bank of America
reckons it gets only 8% to 12% utilization of the 48,000 servers it runs at a dozen data centers. In June it convened 43 suppliers and told them the bank would ditch most of them and choose a handful to help boost utilization to 50%. “We’re going to start killing things off,” says William Conroy, the bank’s enterprise architecture chief. “We’re on a strategy to simplify. We’ve got 2,400 applications running. We’ve got 24 different ways to open an account. We want to clean up the redundancies.”

Bank of America could spend $200 million on this overhaul, a prize for new barbarians like Coleman and the Cassatt crowd. Cassatt’s program, Collage, sits atop a pool of servers and shifts processing power to each application to meet computing needs on the fly, borrowing muscle from other servers that are idle. This arrangement lets companies do the same work with fewer processors. They will save millions of dollars on the hardware but pay Coleman’s company approximately $2 million to install Collage on a 1,000-server cluster. Collage is now in use at the National Association of Securities Dealers, the U.S. Joint Forces Command and the U.S. Defense Contracts Management Agency. Credit Suisse and
FedEx
are testing it.

Collage acts like a turbocharger to let a gaggle of cheap servers outgun far bigger machines. Pharmaceutical giant
Pfizer
became a Cassatt customer after a demo in which Collage enabled a $300,000 cluster of IBM blade servers, running 24 ordinary Intel microprocessors, to crunch through an Oracle data warehousing job in 45 minutes. Previously Pfizer had run the job on a $3 million Sun machine; it took five and a half hours.

Now Pfizer is rebuilding its data center, tearing out high-priced Sun servers and installing low-end Intel machines. The goal in the pharmaceuticals division is to go from 600 servers to 300 and to boost utilization to as high as 70%. “We’re trying to drastically simplify the software and hardware,” says Richard Lynn, a vice president at Pfizer. Of course, a simpler system requires fewer people to run it.

Cassatt will hit only $5 million in sales this year and may triple in size the next. Its sales reps must contend with incredibly long buying cycles. Pfizer took more than a year to close. Bank of America won’t choose suppliers until later this year and will parcel out work over several years. “This isn’t like selling a new word processor or some Web server software where we can just send a guy into a building and tell him to make a sale,” says Matthew Green, 47, who runs the 27-person sales team at Cassatt. Green had overseen a 1,300-member sales army at BEA but had retired in August 2002 and was racing Ducati motorbikes before joining Coleman.

Robert Gingell, who came to Cassatt as head of development after a 19-year career in engineering at Sun, says “high anxiety” lies in designing software for a future world that is still taking shape. “We’re still in the fog. We stumble around a bit. We know there’s going to be a big business here for someone who gets in the right place at the right time with the right product. But there’s a risk that maybe we haven’t hit the middle of the highway, and instead we’re over on the frontage road,” he says. “And if the market takes too long to develop, others who lag behind us now will have time to catch up.”

Yet the advantages of the Cheap Revolution are so compelling that nothing is likely to thwart this shift–and this time customers themselves are leading the pack. The history of high tech is marked by three big waves. First came mainframes, which ruled in the 1950s and 1960s. They began to give way in the 1970s to the second wave: less costly midrange minicomputers. By the late 1980s minicomputers were being pushed out by the third wave: networks of pcs and Unix-based servers. Each iteration wiped out past leaders and created new giants. Amdahl all but vanished when mainframes collapsed; midrange makers Digital Equipment Corp. and Data General rose to take its place. Then Digital and Data General were wiped out by the likes of Compaq,
Dell
and Microsoft in pcs and Sun Microsystems in Unix servers.

Now comes the fourth wave, as computing costs ratchet down yet again. Sun Micro and other purveyors of proprietary designs were immune to the threat for years because off-the-shelf chips from Intel and amd weren’t yet strong enough to compete head-on. But today’s PC microprocessors, lashed together by the dozens, cheaply outgun the specialized chip engines that powered Sun, SGI and others. Linux, the MySQL database and other low-cost open-source software, first created by amateurs, have evolved at Internet speed and are now polished enough to rival products from Microsoft and Oracle. Systems assembled with these elements cost 90% less than last-generation systems, yet can run faster and are more reliable.

The cheap stuff has evolved so quickly and become so solid that the newest technology firms have built their businesses on it.
RightNow Technologies
, a software maker in Bozeman, Mont., rakes in $87 million in annual sales while shunning the likes of EMC, Microsoft, Oracle and Sun. It runs three data centers with 500 cheap Intel-style boxes running Linux and other down-and-dirty code, like
Apache
and MySQL. This let RightNow start up with tech spending at 6% of revenue; it would have been two-to-three times more using commercial programs.

“This is our raw material. It’s as if we’re an auto manufacturer and we’re getting our steel for free,” says Greg R. Gianforte, founder and chief executive of RightNow, whose clients include John Deere and
British Airways
.

Google
, too, is a Cheap Revolutionary, running on hundreds of thousands of PC-style Linux servers. Its success has persuaded big banks and other companies to embrace the low-cost wave and rebuild their data centers. The Chicago Mercantile Exchange (NYSE: CME- news- people) switched from Sun servers costing up to $300,000 apiece to Linux-on-Intel boxes at $4,000 each. Yet the cheap system processed a trade in 50 milliseconds, one-fourth the time needed by the Sun system.

European investment bank Dresdner Kleinwort slashed $150 million a year from its $900 million tech budget by rolling out four clusters of low-end Linux servers to supplant half of its Sun systems. “Wherever possible, we’re using Linux and other open-source programs,” says J.P. Rangaswami, head of alternative market models at Dresdner Kleinwort.

E-Trade Financial dumped Sun for Linux-on-Intel in 2002 and found that the new machines were faster and more reliable. Before the switch the online brokerage ran a data center that cost $25 million to operate, and this one costs only $3 million. E-Trade’s tech budget this year is $180 million, down from $450 million in 2000, yet the firm serves 40% more customers, manages nearly three times the assets and generates 70% more revenue.

“We saved tens of millions of dollars a year on hardware, maintenance and software licensing. And we kept looking for the gotcha: What were we missing? But we weren’t missing anything,” says Gregory Framke, chief information officer at E-Trade, which is now testing an open-source database that could replace proprietary programs from
Sybase
. “This is how computing needs to be done.”

Despite chintzier budgets, the new barbarians can reap a fortune on this fourth wave. Once companies start rebuilding their back-end data centers other changes become possible.
H&R Block
first replaced costly
Hewlett-Packard
Unix servers with simpler Linux machines; now it is rolling out easy-to-use open-source Zimbra e-mail for 100,000 seasonal employees. It may switch to Zimbra for its 18,000 full-timers, dumping Microsoft Exchange, says Marc West, chief information officer at the tax-prep firm.

Worse yet for Microsoft, West says he has no plans to upgrade anytime soon to Vista, the much-delayed overhaul of Windows. He is looking at scaled-down Linux desktops and open-source database software to replace software he now buys from Microsoft and Oracle. West desperately seeks simplicity, yet the incumbents keep piling on features and complexity. “We’re spending lots of our time just keeping components operational,” he says.

To brace for the Cheap Revolution, Microsoft et al. will be forced to give up the fat profit margins they have enjoyed for years. Executives at Microsoft acknowledge that a fourth wave has begun but insist Microsoft will dominate it. “We’re on the leading edge. People in the open-source community are following our wake,” insists William Hilf, a general manager. Racing to keep up with Google in delivering software over the Internet, Microsoft will spend a billion dollars this year on similar capabilities and has already rolled out 30 online products. It also has slashed some prices and set plans to link some programs to Linux, even while trying to kill off the rival by telling customers it is risky, unreliable and a dubious bargain.

Oracle is countering MySQL, Ingres and the like with its own low-cost programs and even a few free apps. It also pushes a version of its flagship database geared for clusters of Linux-on-Intel machines. Network Appliance, with $2 billion in annual sales, has redesigned its data-storage boxes to let them work better with low-cost Linux clusters. Industrial Light & Magic uses NetApp filers on the 3,000-node Linux server farm that was used to make Star Wars movies. “This is where the future goes in enterprise computing,” says NetApp Chief Executive Daniel Warmenhoven.

Storage king EMC ($9.7 billion in 2005 revenues) also surfs the fourth wave, redesigning its hardware to replace some of the custom-built components with cheaper off-the-shelf parts. This has pushed the cost of EMC’s entry-level product down to $5,000 from $50,000 a few years ago. EMC also is diversifying into software, buying VMware and other outfits. Networking leader Cisco has cut costs by embedding Linux and the MySQL database into its products. Cisco also is diversifying, acquiring companies like set-top-box maker Scientific-Atlanta.

Coleman, however, points out that so far every new wave of computing has been dominated by newcomers, not by leaders of the previous generation. To survive, he says, companies must undergo a transplant of corporate DNA, and few survive the surgery. “Startups,” he says, “always define the new era.”